We were already seeing signs of a recession, and then inversion of the yield curve happened — confirming the fears.
Yet adding a black swan scenario on top — a global pandemic — may be the cherry on the cake.
The course that the year and the decade will take depends on many factors. Short-term, the main one is COVID-19.
People tend to be over-confident or over-panicked. We can see this in markets and bubbles, and we are seeing this too with the outbreak. Just a couple weeks ago people were talking about “insignificant risks” and “people freaking out” — unfortunately those didn’t figure out that you either panic early and prevent, or panic late and suffer.
How may this black swan event trigger a recession? First, consumption will drop. People staying at home means they will spend less in local businesses. Every business with a local presence will suffer. This black swan scenario will also make insurance companies and tourism go bankrupt — although many big companies will be rescued by the government.
Which takes us to the second point: crazy inflation. Governments make money when people conduct business and pay them taxes. As consumption drops and healthcare costs go up, they will bleed and resort to their never ending solution: printing money. Inflation makes everyone poorer.
Big companies will be rescued by the government, but small and medium businesses won’t. Most businesses cannot afford a sustained drop in their income for months, and they will close doors. That will leave many unemployed, which will make the medium class poorer. Even employees in big companies may get fired, as these organizations will be forced to work remote — and let’s face it, most of them will absolutely suck at it. Which means their performance will drop, and therefore their revenues — forcing layoffs.
Finally, inflation makes everyone poorer. Or at least everyone who survives on cash and cannot afford to invest, which is most people.
This recession may increment the wealth gap even more.
It would be the perfect time for governments to introduce UBI, but they probably won’t.
In the best case scenario, we will be able to contain the pandemic with lockdowns and it will be over soon. Then markets will correct and everything will follow its course.
In the worst case scenario, the economy will take a hit and it will take years to recover — entering in a fully-fledged recession.
As I said before, society goes to extremes. Markets may overreact, and the overreaction may end up having worse economic effects than the pandemic itself.
What does this mean to you?
Whatever happens, we may lose some of our elderly and loved ones. This will leave a scar in our generation.
We will see panic in the markets over the course of the next months, and some industries like insurance and tourism will be completely wiped out.
If we enter a recession, unemployment may skyrocket, we will all get poorer, and it may take several years to come back to normal.
What does this mean to crypto?
It’s hard to say. Crypto is as less dependent on local infrastructure as it gets — it just needs the Internet. So if there’s an asset class that could appreciate in this situation, it’s crypto.
On the other hand, appetite for risky assets may decrease as people go back to gold or even basic supplies (when $MASK?).
But fiat inflation may make crypto — specially Bitcoin — a safe hedge against government-issued currency.
So we may not see a bull run for years, or we may see one soon — hard to tell.
To end, what really infuriates me is that some people didn’t take the risk seriously — therefore contributing to this becoming a pandemic. For those who were overly confident just weeks ago, please do us all a favor and don’t take health for granted. You may not only have contributed to a global pandemic, but to the start of a global recession.
I wish we could have learned this lesson without the human costs involved and potentially losing loved ones.